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Small office buildings emerging as ideal owner/user investments

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More and more businesses in San Diego County are looking to purchase their own buildings as investment opportunities, versus leasing office suites as tenants.

A current trend is to invest in owner/user properties. Owner/user is an industry term used to describe an owner of an office, industrial or retail building, who also occupies all or a portion of the building. In many cases, the owner leases any unoccupied portions of the building to other businesses.

Tim Moore

Unfortunately, the challenge and expense of either finding a building to purchase or constructing a new building has prevented many companies from doing so. In the current real estate climate, demand is substantially higher than supply.

The good news is that a number of developers are working to address the supply/demand imbalance, particularly in North County.

In Vista, GVA IPC brokered the acquisition of a 1.38-acre land parcel for McMahon Development Co., which recently broke ground on 78 Office Plaza. The development encompasses four one-story buildings, ranging in size from 3,927 to 5,149 square feet. The property features 72 parking spaces, lush landscaping and close freeway access and visibility. To date, one office building and one medical building have been put into escrow to owner/users, while two office buildings remain available for purchase.

The 78 Office Plaza is one of numerous transactions within the last year that have involved owner/users in San Diego County. Today, more office buildings in the 4,500- to 9,000-square-foot range are being built to attract smaller businesses.

Emergence of this trend is due in part to efforts by the Small Business Administration (SBA) to help small business owners qualify for loans, together with lower interest rates for permanent financing.

Historically low financing is one of the primary drivers behind the current demand. Financing can be sought through traditional commercial real estate loans or more highly leveraged SBA guaranteed financing. Commercial banks offer SBA Guaranteed 7(a) or 504 loans with as little as a 10 percent down payment.

In addition to SBA financing, there are numerous advantages of purchasing your own building instead of leasing, including:

? Effective cost to occupy is less than the cost to lease;

? Control of the building (no landlord);

? Building improvements can be expensed and controlled;

? Flexibility to grow within the building;

? Deprecation and other expense tax deductions;

? Retirement investment;

? Financing mechanism for later needs (sale leaseback); and

? Pride of ownership.

Keep in mind that for business owners, the interest on the mortgage can be written off as a business expense. Plus, owners can avoid having to renegotiate leases as they would for rented spaces, and would no longer be subject to rent increases.

Owners also are likely to accrue some appreciation for building ownership.

The bottom line is that finding and purchasing a building can be a long process, as this product type can be hard to come by in the current market.

However, there are developers working to meet the growing demand, and, in the long run, owner/user properties can prove to be a profitable investment -- particularly for small businesses.

If you are considering a purchase, it is paramount that you start looking early, be pre-approved, use a broker to constantly keep you informed of available buildings, and be absolutely ready to purchase.

Moore is a vice president specializing in office and industrial properties for GVA IPC (formerly IPC Commercial Real Estate). More information about the company is available online at www.gvaipc.com.>

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